|Capital gains home-sale tax break
a boon for owners
And your actual habitation of the home doesn't have
to be sequential, notes Mark Luscombe, lawyer, accountant and principal
tax analyst at CCH Inc., a Riverwoods, Ill.-based provider of tax
law information and software. The IRS lets you aggregate your time
living in the house to meet the two-year residency requirement.
"Generally, if you owned and used the home as
your main home for periods totaling at least two years within five
years ending on the date of these sale, you're eligible for the
exclusion," says RIA's Trinz. "You look back at the last
five years. Ownership and use may be at two different times. This
would apply if you owned a home for five years, but didn't use it
as your primary residence for that full period. For the first three
years, you rented it and then moved into it as your main home for
the final two before you sold it."
But you don't even have to live in the house at the
date of sale. The flexibility of the use test means you could live
in your house for a year, rent it for two, move back in for another
year and rent it again the year before you sell. Since during those
five years you owned and lived in the property for two years, you
meet the use and ownership tests.
Finally, while technically there's no limit on the
number of homes you can sell and thus reap tax-free gain, each sale
must be at least two years apart. That still leaves you room to
make some money on several properties. You can sell your residence
this year, pocket any gain within the tax limits and buy a new residence.
Two years later, you can do the same thing, again and again every
There even are situations where owners of multiple properties might
be able to double up on the tax-free gain.
"There might be instances where you sell your
primary residence and then establish your vacation home as your
primary home for a couple of years and then sell that home,"
says Trinz. "Empty nesters who have a large suburban home could
move into a vacation home at the beach and then as they get older
move to a residential facility so they can sell both the homes and
not have any taxable gains."
Be careful, however, if you move into a rental property
you acquired through a like-kind
exchange. The American Jobs Creation Act that was signed into
law on Oct. 22 establishes a tougher test in these cases. If the
property you convert to your principal residence is one that you
earlier obtained via a property swap, in order to take advantage
of the home-sale exclusion you must have acquired the property at
least five years earlier.